Shale Seen Shifting Flows at America’s Biggest Oil Port

With domestic production at a 28-year high, Louisiana Offshore Oil Port LLC’s managers are thinking the previously unthinkable: they want to reverse the flows and send North American oil out as well as take foreign oil in. Source: Louisiana Offshore Oil Port LLC via Bloomberg

July 10 (Bloomberg) -- For more than 30 years, the
Louisiana Offshore Oil Port LLC has been a symbol of U.S.
dependence on foreign oil, pumping Nigerian and Saudi Arabian
crude from the world’s biggest supertankers into underground
storage caverns beneath the marshes of southern Louisiana.

Now, with domestic production at a 28-year high, LOOP’s
managers are thinking the previously unthinkable: They want to
reverse the flows and send North American oil out as well as
take foreign oil in.

To be an outbound hub, the port needs financial commitments
from shippers to build needed infrastructure, and even under the
most optimistic scenario, it will be a year before it loads the
first tanker, Barb Hestermann, LOOP’s business development
manager, said by phone yesterday. Still, the fact that LOOP is
considering the project underscores how shale drilling and oil-sands mining have altered energy flows in North America.

“This is what oil independence is all about,” Carl Larry,
president of Oil Outlooks & Opinions LLC in Houston, said by
phone yesterday. “We’re going to get to the point where we
reach maximum capacity of oil storage in the Gulf Coast and
we’re going to have to move that crude out to somewhere else.”

The terminal was conceived in 1972, a year before the Arab
oil embargo, and opened in 1981. It’s owned by units of Marathon
Petroleum Corp., Valero Energy Corp. and Royal Dutch Shell Plc.
It remains the only port in the U.S. that can unload Ultra Large
Crude Carriers and Very Large Crude Carriers, the two biggest
classifications of oil tankers.

Salt Caverns

Instead of pulling into a dock along the shore, vessels
unload at buoys about 20 miles (32 kilometers) south of the
Louisiana coast. A pipeline 48 inches in diameter transports oil
to storage tanks and underground caverns carved out by injecting
fresh water into natural salt formations.

The caverns sit one-third of a mile below ground, hidden
beneath brackish bayous in Clovelly, Louisiana. All that’s
visible are massive arrays of pipes shooting out along the
surface of the water. Combined with the tanks, the caverns give
LOOP about 69 million barrels of storage, making it the U.S.’s
largest private terminal.

Shipments into the port peaked in 2005 at 1.18 million
barrels a day, according to Louisiana state records, about 12
percent of total U.S. imports. Deliveries dropped below 1
million barrels a day in 2009 and last year fell to 658,000, the
fewest since 1985.

Falling Imports

The decline mirrors that of total U.S. imports, which fell
to 6.47 million barrels a day in the week ended May 16, the
least since 1997, U.S. Energy Information Administration data
show. Net liquid fuel imports, as a percentage of consumption,
are projected to slip to a 45-year low in 2015, Adam Sieminski,
the EIA’s administrator, said in a July 8 statement.

Improvements in horizontal drilling and hydraulic
fracturing have drawn crude from previously unreachable
formations in Texas and North Dakota, propelling U.S. output to
8.5 million barrels a day, the highest level since 1986.

West Texas Intermediate crude, the U.S. benchmark, weakened
from a historical premium to a discount versus global prices
starting in 2011 as domestic supplies began to build. WTI
settled today at $5.74 a barrel less than the European
benchmark, Brent.

The terminal modified its buoys in 2012 to accept smaller
tankers carrying domestic crude. About 13 percent of the port’s
volumes have come from Texas so far this year.

Canadian Crude

The next step could be loading that domestic oil or crude
mined from Canada’s oil sands onto tankers. Engineers have
finished preliminary planning on two projects that would allow
the reversed flows, Hestermann said.

One would make the existing pipeline between the buoys and
storage bi-directional. That would take about a year to
mechanically complete. The port is still receiving enough
inbound shipments that it would be challenging to switch the
flows long enough to load a vessel, Hestermann said.

The long-term solution is building another pipeline
dedicated to loadings. That would take about two to three years,
and would require new permits, she said.

The mechanical changes aren’t the end of LOOP’s challenges.
The terminal’s chief advantage over other ports like Corpus
Christi, Texas, and St. James, Louisiana, would be its ability
to load the world’s largest tankers.

A law known as the Jones Act requires all shipping between
U.S. ports to be done aboard American-built-and-crewed vessels,
most of which are small enough to use existing ports.

U.S. Restrictions

The U.S. also restricts exports of domestic oil, with
shipments to Canada allowed. Oil exports totaled 268,000 barrels
a day in April, the highest since 1999, according to EIA data.

The U.S. Commerce Department recently told two companies
that some ultra-light oil from the Eagle Ford known as
condensate, which goes through a stabilizing process at the oil
field that includes a distillation tower, can also be exported.

LOOP can receive Eagle Ford crude through Shell’s Ho-Ho
pipeline, and it has received condensate, Terry Coleman, vice
president for business development, said by phone. It hasn’t
evaluated opportunities surrounding stabilized condensate
exports, he said.

The terminal accepts Mars and Thunder Horse oil from the
Gulf of Mexico via offshore pipelines. If output from those
fields increases as expected in the next few years, it could
provide another push for vessel loadings, Hestermann said.

Big LOOP

One path that could be promising is re-exporting Canadian
oil. Production in Canada has risen 42 percent to 3.6 million
barrels a day in the past five years. The U.S. allows re-exports
of foreign crude that hasn’t been mixed with domestic oil.

For now, LOOP doesn’t have access to a steady flow of
Canadian crude. It has received a few shipments down the Seaway
pipeline and loaded onto vessels at Freeport, Texas, Hestermann
said.

A new rail terminal or pipeline project might give them the
access they need. Changes to U.S. export policy or the Jones Act
might also provide a boost to their efforts.

“Anything that would allow larger vessels, that’s what
really makes our project more viable,” Hestermann said. “LOOP
is all about big.”